The future of car finance in China

For readers who may be less familiar with the tier structure of the cities in China, the largest city is Shanghai, with a population of more than 22 million people; the second largest is Beijing with around 12 million.

There are thirteen additional cities with populations of more than 10 million and a further 65 cities with more than 1 million people, in addition to 360 cities with less than 1 million.

By way of comparison, the last category tends to mirror the population densities as typically found in many European cities.

These cities are then ranked on a number of economic indicators and categorised as holding Tier 1,2,3, & 4 status.

With more than 28 million new vehicle registrations in 2017, China is the world’s largest car market by a considerable margin.

Whilst growth in vehicle sales has slowed by comparison to 2016, primarily because of broader economic reasons, the market is still expanding, helped greatly by a national finance penetration rate that is currently 43% and rising.

These factors alone will ensure that this vast market, where many provinces are untapped, remains extremely dynamic in every respect.

Consequently, opportunities abound for growth in vehicle sales as manufacturers, their National Sales Companies (NSC’s) and captive financiers place considerably greater focus on the smaller Tier 3 – 4 cities.

Tier 1 and 2 cities are very well developed and demonstrate many of the business characteristics and challenges that NSC’s and their captive financiers encounter in many other mature global markets.

As a result, this maturity has created a very competitive landscape which in turn is rapidly driving new product innovation from the captive community and their brand partners to protect and sustainably grow their market share.

Amongst a number of topics tabled and discussed at the conference was the scope for growth in residual value (RV) funding solutions.

These are similar to Personal Contract Purchase (PCP) in the UK and Closed End Personal Lease in the US.

In many instances these products are at the forefront of the captives’ strategy and will, in the first instance, allow customers greater accessibility by making vehicles more affordable, as well as making it easier to walk customers up the brand’s model range.

In the short-term, RV funding will undoubtedly result in improved sales volumes and over time will serve to shift the customer mindset from ownership to usage, as is the case in many other major global markets.

In our world of ‘new mobility’, consumers, especially the younger generations, are far more open-minded in respect of usage compared to ownership. It is just not that big of a deal to them. This bodes very well for vehicle sales.

RV funding solutions have much greater reach than simply accelerating unit sales because they (in most cases) generate a lower monthly payment.

The fact of the matter is that RV funding is the essential component in establishing a robust customer trade cycle management eco-system.

This eco-system will allow NSC’s and captives to forge ever closer relationships directly with the end-user and drive retention and repurchase in equal measure.

Organising the used car market

Remarketing of used vehicles, especially in Tier 1 and 2 cities, remains fraught with complexity.

In the majority of cases used car dealers can present a vehicle to a prospective customer on their own premises, but not transact.

Instead, the buyer and seller must meet at an approved centralised location in order to transact, at which time a fee is levied by way of a tax on the total purchase price of the transaction.

There is no dealer/trade plate system in operation either. This means that each vehicle held in stock must be registered. As vehicle licence plate ownership resides with the individual and not the vehicle, this causes further complication.

Furthermore, licence plates are not issued on demand by the vehicle registration agency, which causes acute problems in the major cities.

For example, in Beijing customers have to enter a lottery to win a licence plate; in Shanghai customers have to bid at auction, with prices currently running at around £11,000 or USD$20,000, with no guarantees of a plate being allocated.

Additionally, access to data services such as vehicle history checks, through HPI or Experian in the UK, or Carfax in the US, are not available.

Finally, used vehicle pricing for consumers is not transparent, as access to used vehicle valuation services and data in general is limited.

While quality data can be sourced from several reputable suppliers, it is not widely adopted as the de facto reference point for buyer and seller, although this is now changing rapidly, as awareness of data availability coupled with technology makes accessing information far easier.

This complexity makes it extremely difficult for franchised dealers to sell used vehicles. Therefore, the market is controlled by independent traders.

Even when taking these complexities into account, there are two major captives that I am aware of who successfully promote RV funding solutions via their franchised networks, primarily in the Tier 1 & 2 cities.

This illustrates clearly the old saying “where there is a will there is a way”.

Change is in the air

The focus of many NSC’s and captives is now squarely on Tier 3 – 4 cities, as they represent a tremendous opportunity for sales.

In the vast majority of instances, these cities have excellent under-utilised infrastructure by way of roads, airports and so on, coupled with burgeoning consumption among residents who have higher levels of disposable income, fuelled by lower housing and public service costs.

As a consequence, there is considerable pent-up demand for vehicle ownership/usage.

This is especially relevant for all manufacturers of mainstream family-focused brands, be they domestic, European or American.

Crucially there are no plans to institute vehicle licensing restrictions in the lower tiered cities, which makes these sizeable markets all the more interesting and valuable to develop.

This optimism was illustrated in a conversation I had with a senior executive from one of the major captives operating in China.

He shared that dealer profit as generated by F&I income has doubled in the past five years for the brands he supports. It now accounts for 30% of the gross profit on the sale.

Moreover, he is bullish about expansion into the Tier 3 & 4 cities and fully expects that finance penetration aided by the introduction of RV funding solutions will allow his company to reach 70% penetration in the coming years.

Whilst this is a bold forecast indeed, based on the evidence it is one that I strongly agree with.

* Paul Bennett is director of international business development at Autofutura, a specialist provider of global data management software solutions and consultancy to the automotive finance and leasing industry.